RICHARD CANNISTRARO, PETITIONER V. UNITED STATES OF AMERICA
No. 90-1147
In The Supreme Court Of The United States
October Term, 1990
On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Third Circuit
Brief For The United States In Opposition
TABLE OF CONTENTS
Questions Presented
Opinions below
Jurisdiction
Statement
Argument
Conclusion
OPINIONS BELOW
The memorandum opinion of the court of appeals, Pet. App. 1a-3a, is
unreported, but the judgment is noted at 919 F.2d 137 (Table). A
prior opinion of the court of appeals is reported at 871 F.2d 1210.
The opinion of the district court denying petitioner's motion to
withdraw his guilty plea, Pet. App. 1b-59b, is reported at 734 F.
Supp. 1110. A prior opinion of the district court is reported at 694
F. Supp. 62.
JURISDICTION
The judgment of the court of appeals was entered on October 15,
1990. The petition for a writ of certiorari was filed on January 14,
1991 (a Monday). The jurisdiction of this Court is invoked under 28
U.S.C. 1254(1).
QUESTIONS PRESENTED
1. Whether petitioner's conduct violated the federal securities
laws.
2. Whether petitioner received effective assistance of counsel in
entering his plea of guilty.
3. Whether the proceedings at which petitioner's guilty plea was
accepted conformed to Fed. R. Crim. P. 11.
STATEMENT
After a plea of guilty in the United States District Court for the
District of New Jersey, petitioner was convicted of conspiracy to
commit securities fraud, in violation of 18 U.S.C. 371; four counts
of deceptively using nominee securities accounts, and one count of
creating and distributing a misleading stock research report, in
violation of 15 U.S.C. 78j(b); interstate transportation of money
taken by fraud, in violation of 18 U.S.C. 2313; mail fraud, in
violation of 18 U.S.C. 1341; and obstruction of justice, in violation
of 18 U.S.C. 1503. He was sentenced to eight years' imprisonment and
five years' probation, fined $330,000, and ordered to pay $394,947 in
restitution. On petitioner's first appeal, the court of appeals
remanded the case for reconsideration of the prison term imposed. On
remand, petitioner moved to withdraw his guilty plea. After a
hearing, the district court denied the motion and reimposed the same
prison term. On petitioner's second appeal, the court of appeals
affirmed. Pet. App. 1a-3a.
1. Petitioner was a securities research analyst with the brokerage
firm of Wood Gundy, Inc., and an officer and director of Liquidation
Control, Inc. (LCI). In November 1982, LCI made a public offering of
securities. Monarch Funding Corporation served as the underwriter for
the offering and as a market maker for aftermarket trading. At the
time of the offering, petitioner established nominee accounts at
Monarch in the names of Mary Godano, his aunt, and Edward Cannistraro,
his father. Through those accounts petitioner, who already owned
975,000 shares of LCI stock, purchased 120,000 units (consisting of
common stock and warrants) of LCI securities for $30,000. During
December 1982 and January 1983, petitioner sold the LCI securities in
the nominee accounts for a profit of at least $90,000. C.A. App. 13,
18, 61, 64, 77-78, 83, 1022, 1033-1034.
In December 1982, petitioner proposed that William Fritz, portfolio
manager of a trust fund (the M & I Fund), have the fund purchase large
blocks of LCI securities. To induce those purchases, petitioner
promised to open a nominee account at Monarch for Fritz and arrange
for that account to be allocated shares of LCI and of another company,
Toxic Waste Containment (TWC). Petitioner told Fritz that he "could
make money" through the arrangement. Petitioner later arranged for
the allocation to Fritz's account of 7,000 shares in the LCI offering;
those shares were sold in February 1983 for a profit to Fritz of
approximately $5,500. In March 1983, petitioner assisted in the
purchase and sale for Fritz of TWC securities, for a profit of
approximately $50,000. C.A. App. 60, 71-74.
In return, in December 1982 Fritz caused the M & I Fund to purchase
60,000 shares of LCI common stock for a total investment of $75,000.
In February 1983, Fritz caused the M & I Fund to purchase an
additional 50,000 shares of LCI common stock for approximately
$84,000. In July 1983, Fritz sold the fund's 110,000 LCI shares for
$35,000, or a loss to the fund of approximately $125,000. C.A. App.
1031.
In January 1983, petitioner entered into a similar agreement with
Bynum Vickory, the protfolio manager of a mutual fund (the Bullock
Fund). Petitioner established a nominee account at Monarch for
Vickory and committed to have Vickory allocated stock in the next
initial public offering at Monarch, namely TWC. That month Vickory
caused the Bullock Fund to purchase 25,000 shares of LCI for a total
purchase price of approximately $40,000. Those shares were later sold
for a loss to the fund of $25,000. Petitioner subsequently arranged
for the Vickory nominee account to purchase 4,000 units of TWC
securities, which were later sold for a profit to Vickory of
approximately $25,000. C.A. App. 75-76, 1032.
In February 1983, TWC made a public offering of securities. At
that time, petitioner established nominee accounts for himself at
Monarch in the names of Donna Lee Clarambeau and Carl Alan Key.
Clarambeau was paid for the use of her name. Through those accounts,
petitioner purchased 80,000 units of TWC securities for a total cost
of $20,000. On March 9, 1983, petitioner sold the TWC securities in
the Key account for a profit of $4,695. On March 10, 1983, petitioner
sold the TWC securities in the Clarambeau account for a profit of
approximately $50,000. C.A. App. 62, 66, 69, 82, 1040, 1042.
In his capacity as a Wood Gundy analyst, petitioner drafted a
research report recommending the purchase of TWC securities, in which
he failed to disclose the existence of the nominee accounts or his
arrangements with Fritz and Vickory. On March 10, 1983, petitioner
caused a wire to be sent to Wood Gundy's offices throughout the world
announcing that petitioner would soon be issuing the report.
Petitioner caused Wood Gundy to issue the report on March 17, 1983,
and again in April and May 1983. Petitioner also sent a copy of the
report to Ground Floor Publications, an investment news organization,
"hoping it would be used in Ground Floor's publication," and he
confirmed false and misleading information in a telephone conversation
with a reporter from Ground Floor. As a result, Ground Floor
distributed to its subscribers another favorable report on TWC. C.A.
App. 62, 68-69, 83-84, 1045.
As a result of petitioner's activities, petitioner and his
co-conspirators netted approximately $250,000 in profits from the sale
of LCI and TWC securities. /1/ C.A. App. 1028.
2. Petitioner pleaded guilty to all nine counts of the indictment.
Before accepting petitioner's plea, the district court conducted a
hearing pursuant to Federal Rule of Criminal Procedure 11. In a
statement at the time of his guilty plea and in response to questions
propounded at that hearing by the court and the prosecutor, petitioner
admitted facts establishing that he committed securities fraud by:
(1) bribing investment fund managers to have their funds purchase
securities in LCI, thereby defrauding the funds and manipulating the
price of the stock to petitioner's personal benefit, e.g., C.A. App.
60-61, 71-76; (2) causing a prospectus to be used in sales of LCI
securities that was false or misleading as to petitioner's role in the
offering, in that it failed to disclose that he had secretly bought
securities in the offering through nominee accounts, e.g., id. at 61,
and (3) issuing, in his capacity as a securities analyst at Wood
Gundy, a research report recommending TWC securities, which report was
false or misleading in that it was presented as a disinterested
report, when in fact petitioner had significant interests in TWC
arising out of his use of nominee accounts in trading in TWC stock,
his bribery scheme, and his position at LCI, which was an affiliated
company of TWC. See, e.g., id. at 62, 83-85.
Specifically, petitioner admitted that he knew that a fund's
purchase of LCI stock "would have the likely (e)ffect of increasing
the value of the shares of (LCI) in the open market and that as a
beneficial owner of outstanding shares of (LCI), that I would likely
benefit from the fund's purchases." C.A. App. 61. Petitioner
acknowledged that his actions were done knowingly, intentionally, and
wilfully. Id. at 87, 91. Petitioner also admitted that his research
report was false and misleading in the following respects: (a) it
failed to disclose his use of nominee accounts to purchase TWC stock
in the initial public offering, id. at 62, 83, 85; (b) it failed to
disclose his arrangements with Fritz and Vickory, whereby those
individuals were paid off with TWC securities, id. at 60, 83, 85; and
(c) it failed to disclose his financial relationship to and executive
position at LCI, a company that had an interlocking board of directors
and common management with TWC, and rented office space in the same
building. Id. at 62, 84-85. Petitioner admitted that he created the
research report with the intent to increase the demand for and price
of TWC securities. Id. at 84.
The district court determined that petitioner was competent to
enter his plea and was aware of and understood the charges in the
indictment and the elements of each charge. /2/ Finding that
petitioner's statement and testimony furnished "an adequate factual
basis" for his guilty plea, the court accepted the plea and adjudged
petitioner guilty on each count of the indictment. C.A. App. 91-92.
3. Petitioner appealed his sentence. The court of appeals affirmed
all aspects of the sentence except for the prison term of eight years.
United States v. Cannistraro, 871 F.2d 1210, 1217 (3d Cir. 1989).
Expressing concern that the district court might have relied on and
misinterpreted data concerning sentences in other fraud cases, the
court of appeals remanded the case to the district court for
resentencing. Id. at 1217-1218.
4. On remand petitioner moved, for the first time, to withdraw his
plea pursuant to Federal Rule of Criminal Procedure 32(d). He
presented three grounds for withdrawing the plea: first, that he was
denied effective assistance of counsel; second, that the court had
accepted his plea without an adequate factual basis; and third, that
his guilty plea hearing was defective in that the prosecutor, rather
than the court, conducted some of the questioning that established the
factual basis for the plea. Pet. App. 1b.
After several hearings, the district court found that petitioner
had not presented a "fair and just reason" within the meaning of Fed.
R. Crim. P. 32(d) for withdrawing his plea, and denied petitioner's
motion. The court observed that petitioner had not sought to withdraw
his plea until one and a half years after entering it, and then only
after "what amounts to a loss on appeal." Pet. App. 28b. The court
also took note of petitioner's failure to testify in support of his
motion, id. at 14b; and it observed that petitioner was not asserting
his innocence, but "merely contend(ing) that the plea allocution did
not establish an adequate factual basis" for the plea. Id. at 24b.
Those circumstances, the court stated, suggest that petitioner "does
not believe he is innocent, but merely is unhappy with the sentence
originally imposed." Id. at 23b.
After re-examining petitioner's admissions at the plea hearing, the
court again concluded that an adequate factual basis existed for
acceptance of the plea. The court recounted petitioner's admissions
as to his quid pro quo arrangement with Vickory and Fritz, and
concluded that the arrangement "which the Government aptly
characterizes as a bribery scheme, worked a fraud on shareholders of
the Funds in violation of Rule 10b-5." Pet. App. 30b. The court noted
that petitioner admitted that "as a stock analyst for Wood Gundy, he
failed to disclose the bribery scheme * * * and his own use of nominee
accounts in connection with TWC." Ibid. The court concluded that
"(a)s an allegedly disinterested stock analyst, (petitioner) had a
duty to disclose his interest in TWC to Wood Gundy investors" and that
his admitted failure to do so violated Section 10(b) and Rule 10b-5.
Pet. App. 30b-31b. The court also recounted petitioner's admissions
with regard to his nominee accounts and concluded that his admitted
failure to disclose to the public his interests in or control of these
accounts violated Section 10(b) and Rule 10b-5. Pet. App. 31b-32b.
Finally, the court noted that petitioner had admitted his failure to
disclose material information in his research report concerning TWC,
also in violation of Section 10(b) and Rule 10b-5. Pet. App. 32b.
/3/
Next, the district court held that petitioner received effective
assistance of counsel in entering his guilty plea. The court held
that petitioner's counsel "had a well-conceived trial strategy for the
defense of this case." Pet. App. 36b. The court found that
petitioner's trial counsel adequately reviewed the government's
documentary evidence prior to trial and that this evidence and
counsel's discussions with petitioner convinced counsel that the
government's case "was much stronger than originally anticipated." Id.
at 37b. The court further concluded that trial counsel "found it
difficult to find witnesses to testify on (petitioner's) behalf." Id.
at 38b. Based on its review of the evidence presented at the Rule
32(d) hearings, the court found that "trial counsel attempted to
develop a prudent trial strategy and investigated it to the extent
possible," but that counsel "(u)ltimately" determined that petitioner
did not have a valid defense to the indictment. Pet. App. 41b.
The court also concluded that petitioner was not prejudiced by
counsel's failure to move for a bill of particulars, because the
indictment listed the names of most of the unindicted co-conspirators
and because petitioner himself knew all of the participants in his
transactions and could inform trial counsel of their names. Pet. App.
42b. /4/ In addition, the court rejected petitioner's argument that
his trial counsel should have filed a motion to dismiss Count 9 of the
indictment, which charged obstruction of justice, on the ground that
venue was improper in the District of New Jersey. The court pointed
out that a majority of the circuits have held that venue is proper in
the district where the proceeding sought to be obstructed was pending,
and that petitioner could not "demonstrate (that a) venue motion would
have produced favorable results." Id. at 43b.
Finally, the court rejected petitioner's claim that his guilty plea
proceeding did not conform to Federal Rule of Criminal Procedure 11.
It found that allowing the prosecutor to question peitioner in order
to establish the factual basis for the plea had not prejudiced
petitioner. It also found that petitioner "had a full and complete
understanding of his conduct and the charges against him." Pet. App.
53b, 58b. /5/
5. The court of appeals, in an unpublished opinion, affirmed the
district court's order "essentially for the reasons set forth" in the
district court's opinion. Pet. App. 2a.
ARGUMENT
1. Petitioner contends (Pet. 6-15) that the district court erred in
accepting his guilty plea. He argues that, under Dirks v. SEC, 463
U.S. 646 (1983), Chiarella v. United States, 445 U.S. 222 (1980), and
United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), aff'd by an
equally divided court, 484 U.S. 19 (1987), he did not have a duty to
disclose material information and therefore did not commit fraud by
nondisclosure. That contention is without merit. Petitioner's
liability under the securities laws did not arise from mere silence;
rather, it resulted from his affirmative and systematic acts of
manipulation and misrepresentation, which defrauded investors in the
markets for LCI and TWC and in the funds whose managers petitioner
bribed. A person who has no disclosure duty, and does not commit
fraud by remaining silent, still commits fraud if he engages in
affirmatively misleading acts. See Basic Inc. v. Levinson, 485 U.S.
224, 240 n.18 (1988).
Dirks, Chiarella, and Carpenter all address the liability of a
purchaser or seller of securities under Rule 10b-5 for remaining
silent while in possession of material, non-public information. In
Chiarella and Dirks the Court held that silence constitutes fraud
under Rule 10b-5 only when the trader has a duty to speak, but fails
to make disclosure. Dirks, 463 U.S. at 653-654; Chiarella, 445 U.S.
at 226-230. While noting that corporate officers, directors, and
other insiders owe their shareholders fiduciary duties and must
disclose material information when trading in the company's
securities, the Court determined in those cases that certain corporate
outsiders were not under a fiduciary duty to make disclosure, and
therefore had not violated Rule 10b-5 when failing to disclose
non-public information in their possession. Dirks, 463 U.S. at
653-655, 659; Chiarella, 445 U.S. at 227-230. /6/ In Carpenter the
Second Circuit held that a person who fraudulently misappropriates
information and then uses the non-public information to trade in
securities commits securities fraud under Rule 10b-5. 791 F.2d at
1031, 1034. /7/
As this Court has recognized however, even a person who owes no
duty to disclose may still commit fraud. Rule 10b-5 also applies to
"affirmative misrepresentations by those under no duty to disclose
(but under the ever-present duty not to mislead)." Basic Inc. v.
Levinson, 485 U.S. at 240 n.18. The Rule is violated "whenever
assertions are made * * * in a manner reasonably calculated to
influence the investing public, * * * if such asertions are false or
misleading or so incomplete as to mislead." Id. at 235 n.13, quoting
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) (en
banc), cert. denied, 394 U.S. 976 (1969). The same holds true for
affirmative acts of manipulation. See, e.g. United States v. Charnay,
537 F.2d 341, 349-351 (9th Cir.), cert. denied, 429 U.S. 1000 (1976).
Here, petitioner admitted to engaging in affirmatively manipulative
and misleading acts and statements, which provided an ample factual
basis for his guilt on the securities fraud counts. First, he
admitted, as to Count 1, that he bribed fund managers into purchasing,
on behalf of their funds, securities in a company in which he was a
corporate insider, and in which he held a substantial stake, which
artifically affected price and demand. As petitioner stated, the
creation of a false appearance of demand for LCI stock was designed to
benefit himself personally, and it worked a fraud on persons who
bought LCI stock as a result. Moreover, as the district court noted,
petitioner's bribery scheme "worked a fraud on shareholders of the
(f)unds in violation of Rule 10b-5." Pet. App. 30b. Cf. Index Fund,
Inc. v. Hagopian, 609 F. Supp. 499 (S.D.N.Y. 1985).
Similarly, as to Counts 2 and 3, petitioner admitted to fraud by
misrepresentation. Petitioner rendered the LCI prospectus misleading
when he omitted to state that he had secretly taken an allocation of
stock in the initial public offering. He breached his "ever-present"
duty not to mislead when he failed to see to it that the prospectus
was corrected to reflect his use of nominee accounts to purchase LCI
securities. Cf. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d
Cir. 1972); SEC v. Blinder Robinson & Co., (1983-1984 Transfer
Binder) Fed. Sec. L. Rep. (CCH) Paragraph 99,491 (10th Cir. Sept. 19,
1983), cert. denied, 469 U.S. 1108 (1985); SEC v. Scott, 565 F. Supp.
1513 (S.D.N.Y. 1983), aff'd, 734 F.2d 118 (2d Cir. 1984). /8/
Finally, as to Counts 4 through 6, petitioner admitted that his TWC
research report was misleading in that it failed to reveal his use of
nominee accounts to trade in TWC securities, his bribery arrangements
with Vickory and Fritz, and his financial and executive position at
LCI. Without those disclosures, the report was misleading because it
purported to be the work of a disinterested securities analyst. In
sum, even if petitioner could have remained wholly silent, he chose to
speak. By doing so in a misleading fashion, he engaged in fraud. /9/
Petitioner also argues (Pet. 13-14) that his acts and statements
were not materially misleading, and thus did not violate Rule 10b-5.
Materiality is determined by whether a reasonable shareholder, given
all available information, would consider the misstated or omitted
information to be important in making an investment decision. See
Basic Inc. v. Levinson, 485 U.S. at 231-232; TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438 (1976). Petitioner admitted sufficient
facts to establish a basis for finding that his acts and statements
were materially misleading. The concealed facts here -- that fund
managers were being bribed to purchase securities on behalf of their
funds; that a corporate insider was secretly purchasing stock in an
initial public offering, thus making it appear that there was bona
fide public demand for the stock; that a research analyst
recommending the purchase of a company's securities was in fact
selling large blocks of these securities through nominee accounts;
that the recommended securities were held by persons whom the research
analyst had bribed with the securities; and that the research analyst
was an officer and director of a company affiliated with the company
he was recommending -- could well have "assumed actual significance in
the deliberations" of the reasonable investor. TSC, 426 U.S. at 449.
Petitioner also misses the mark in contending (Pet. 14) that he did
not admit scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185
(1976). During the guilty plea proceeding, petitioner admitted that
he acted knowingly and intentionally in inducing purchases by the
funds of LCI securities, in issuing a false and misleading research
report, and in failing to correct a prospectus to disclose material
information. C.A. App. 91. Such admissions establish petitioner's
knowing participation in violations of the securities laws.
Petitioner also contends (Pet. 15) that he failed to admit facts
sufficient to uphold his mail fraud conviction because, based on his
admissions, the charged mailing was not in furtherance of the scheme.
As petitioner admitted, the bank that purchased LCI stock as part of
the conspiracy would likely communicate, by mail, with LCI's transfer
agent in order to consummate the bank's securities transaction. Pet.
App. 8b. Unlike the credit card invoices that were held not to
further the fraud involved in United States v. Maze, 414 U.S. 395
(1974), the communications with the transfer agent here were integral
to an ongoing scheme that vitally depended on the completion of
securities transactions. Under Schmuck v. United States, 489 U.S.
705, 712 (1989), the mailings furthered the scheme because it did not
"reach fruition" until the securities transactions were completed.
2. Petitioner next contends (Pet. 16-23) that his trial attorneys
rendered ineffective assistance of counsel. Specifically, he argues
that his trial attorneys erred in failing to move for a bill of
particulars, to make a motion to dismiss the obstruction of justice
count for lack of venue, and to conduct an adequate factual
investigation prior to advising him to enter a guilty plea. The
district court properly rejected this fact-bound claim.
To establish ineffective assistance of counsel in the guilty plea
process, a defendant must show that his counsel's performance was not
within the range of competence demanded of attorneys in criminal cases
and that but for counsel's unprofessional errors, he would not have
pleaded guilty and would have insisted on going to trial. See Hill v.
Lockhart, 474 U.S. 52, 58-59 (1985). A "strong presumption" exists
that counsel's performance was reasonable Strickland v. Washington,
466 U.S. 668, 689 (1984). Even "where there is a bone fide defense,
counsel may still advise his client to plead guilty if that advice
falls within the range of reasonable competence under the
circumstances." United States v. Cronic, 466 U.S. 648, 657 n.19
(1984).
None of peitioner's claims meets these standards. As the district
court held, a bill of particulars would not have materially aided
peitioner's defense, because the indictment listed the names of most
of the relevant unindicted co-conspirators and because petitioner
could have provided his attorneys with the names of the potential
witnesses. The indictment in this case is sufficiently detailed to
give petitioner adequate notice of the substance of the charges
against him without a bill of particulars. Nor has petitioner
identified any specific information that he would have obtained
through a bill of particulars. Thus, he was not prejudiced by
counsel's failure to move for one.
Petitioner also is incorrect in asserting (Pet. 19-20) that a
motion for dismissal of Count 9 charging obstruction of justice "would
have been successful." Petitioner argues that the district court would
have dismissed that count for lack of venue because the acts allegedly
giving rise to the obstruction took place outside of the District of
New Jersey. In fact, the district court expressed doubt that it would
have granted such a motion. It also correctly found that counsel was
not ineffective in failing to file such a motion because the great
majority of courts that have considered this issue have held that
venue for an obstruction of justice charge is proper in the district
where the obstructed proceeding is pending. Pet. App. 43b.
The district court properly rejected petitioner's claim (Pet.
20-22) that his trial counsel did not undertake an adequate
investigation. As detailed by the district court, Pet. App. 36b-39b,
trial counsel reviewed the documentary evidence and interviewed or
attempted to interview relevant witnesses prior to trial as part of a
"well-conceived trial strategy for the defense of this case." Id. at
36b. Trial counsel's attention shifted from preparation to
consideration of a plea only upon learning from the investigation that
the prosecution's "case was much stronger than originally
anticipated." Id. at 37b. There is also no merit to petitioner's
claim that counsel selected an investigator hired by an unindicted
co-conspirator. As the district court found, petitioner "directed"
counsel to employ this investigator. Pet. App. 38b.
3. Finally, petitioner contends (Pet. 23-24) that his guilty plea
colloquy violated this Court's decision in McCarthy v. United States,
394 U.S. 459 (1969), because the district court did not personally
question petitioner to establish the factual basis for his guilty
plea. The factual basis for petitioner's plea was established first
by a statement submitted by petitioner that contained a count-by-count
admission that he committed the conduct underlying each offense. See
Pet. App. 5b-9b. At petitioner's guilty plea proceeding, petitioner
stated that he had reviewed that statement with his attorney and that
it was accurate and complete. Id. at 9b. In addition, the prosecutor
extensively questioned petitioner regarding the conduct underlying the
indictment. The district court found that petitioner "denied or
equivocated in answer to some of the questions posed by the
Government, (but) his proffer as a whole established an adequate
factual basis to accept the plea of guilty to all counts." Ibid.
Contrary to petitioner's contention, nothing in either this Court's
decision in McCarthy or in Rule 11 requires the district court to ask
all of the questions designed to establish the factual basis for the
charges to which a defendant is pleading guilty. Rule 11(f) requires
only that the court "satisfy" itself that "there is a factual basis
for the plea." See also Rule 11(c)(5) (emphasis added) ("if the court
intends to question the defendant under oath * * * about the offense
to which the defendant has pleaded" it must inform him that his
statements may be used against him). The Advisory Committee's 1974
notes to Rule 11 specifically state that the Rule does not require
"that any particular type of inquiry be made." Moreover, the courts of
appeals have routinely upheld guilty pleas against challenges that
they lack a factual basis based only on the defendant's own admissions
or proffers by the prosecutor. See, e.g., United States v. Montoya,
891 F.2d 1273, 1295 (7th Cir. 1989); Harvey v. United States, 850
F.2d 388, 395 & n.4 (8th Cir. 1988); United States v. Carter, 815
F.2d 827, 829 (1st Cir. 1987); United States v. Trott, 779 F.2d 912,
914 (3d Cir. 1985).
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
KENNETH W. STARR
Solicitor General
ROBERT S. MUELLER, III
Assistant Attorney General
J. DOUGLAS WILSON
Attorney
JAMES R. DOTY
General Counsel
PAUL GONSON
Solicitor
JACOB H. STILLMAN
Associate General Counsel
ERIC SUMMERGRAD
Assistant General Counsel
RADA L. POTTS
Attorney Securities and Exchange Commission
APRIL 1991
/1/ The unindicted co-conspirators were the fund managers and the
nominees for petitioner and the fund managers.
/2/ Petitioner testified that he held a bachelor's degree and two
graduate degrees. C.A. App. 42. He stated that he had reviewed the
indictment and discussed it with his attorney, that his attorney had
explained the criminal charges, the elements of each crime and the
penalties for each crime, and that he understood the elements of
conspiracy and of the substantive crimes that he was alleged to have
committed. Id. at 43-45, 49-55.
/3/ With respect to petitioner's conviction for mail fraud, the
court noted that petitioner had admitted knowledge that there would be
mail communications between the transfer agent for LCI and TWC and a
bank, and that the bribery scheme and transfer of stock "could not
have occurred without these communications, as (petitioner) admitted."
Pet. App. 32b.
/4/ The court added that it was "far from certain" that a motion
for a bill of particulars would have been granted. Pet. App. 42b &
n.33.
/5/ The court reimposed the same sentence that it had originally
imposed on petitioner, stating that it had not considered the data
regarding sentences in other fraud cases. Pet. App. 12b.
Petitioner's sentence is not at issue in this Court.
/6/ The outsider in Chiarella was a financial printer who deduced
the names of takeover targets from materials submitted to the print
shop, then traded in the securities of those companies without
disclosure. The outsider in Dirks was a financial analyst who learned
from a corporate insider of a fraud in the company, following which
the analyst advised his clients to sell th company's stock. Although
the Court found that neither of those outsiders had disclosure duties,
the Court stated in Dirks that corporate outsiders who acquire
material non-public information from a corporate insider, in breach of
the insider's fiduciary duty, do acquire the insider's duty to make
disclosure when trading with the company's shareholders. 463 U.S. at
659-661.
/7/ The Second Circuit had so held previously in other cases. See
United States v. Newman, 664 F.2d 12 (1981), aff'd after remand, 722
F.2d (Table), cert. denied, 464 U.S. 863 (1983); SEC v. Materia, 745
F.2d 197 (1984), cert. denied, 471 U.S. 1053 (1985); accord SEC v.
Clark, 915 F.2d 439 (9th Cir. 1990).
/8/ Petitioner's contention (Pet. 9) that he could not have
disclosed his purchases in the prospectus because he bought after the
prospectus became effective and was first issued ignores the required
use of the prospectus in aftermarket trading, see generally L. Loss,
Fundamentals of Securities Regulation 116-118 (2d ed. 1988); SEC Rule
174, 17 C.F.R. 230.174, and the need to correct the prospectus to
reflect post-effective events that render the prospectus misleading.
The contention that "(t)he prospectus did, however, list petitioner as
an officer of LCI and set forth a substantial stock position held in
his name" (Pet. 7) misses the point. What was of importance was
petitioner's undisclosed role in facilitating the public offering
through his secret purchases in the offering, thereby making the
public demand for the securities seem greater than it actually was.
/9/ That is not to say petitioner owed no disclosure duties. As an
officer and director of LCI, petitioner was a classic corporate
insider who owed a fiduciary duty of disclosure when trading in LCI
securities. Chiarella, 445 U.S. at 227-230. Petitioner breached that
duty when he sold LCI securities from his nominee accounts into the
aftermarket while failing to disclose to purchasers that the apparent
public demand for LCI securities had in fact been procured in
significant part by bribing fund managers, and by a corporate
insider's taking an allocation of securities in the offering.
Petitioner, as a securities broker, also had disclosure duties as to
TWC as a result of his recommendation of that company's securities.
See generally L. Loss, Fundamentals of Securities Regulation 825-826
(2d ed. 1988) (discussing obligation of broker-dealer recommending
securities to disclose any bias of the firm, its partners, officers,
and directors, or of any employee assuming responsibility for the
recommendation).